Principles,problems and perspectives of Islamic banking

Since the late 1970s, financial institutions (banks, investment companies, insurance companies) have grown up in many countries in the Moslem world with the intention of conducting their business in accordance with Islamic, or Shariah, law. Above all else, this means business involving no interest payments. The following article explains the most important principles of Islamic banking and outlines some of the problems which appear to be most central to this sphere.     

Setting standards for Shariah application in the Islamic financial industry

The global growth of Islamic banking is taking advantage of the diversity and flexi‐bility in the fiqh opinions (often referred to as Shariah) to meet the challenges of growth. While the flexibility in fiqh opinion is presently contributing to global growth, it may soon become a constraining factor in the global growth of the industry if the challenges arising out of the use of diversity and flexibility in fiqh are not properly rec‐ognized and regulated. Though the infrastructure for standardizing the supervision and monitoring of the global expansion of the Islamic finance industry is rapidly growing, institutional arrangement for a regulated use of diversity and flexibility in Shariah rules is still a missing link. Such an institutional arrangement is needed not only to prepare the industry to play a bigger role in the development of global economy but also to ensure the adherence to the very specific element that makes the industry an “Islamic” industry. © 2007 Wiley Periodicals, Inc.     

Effects of communication and financial concerns on banking attitude-behaviour relations

Despite extensive discussion of the concept of Islamic banking, which is based on the fundamental doctrines of Islamic law (Shariah) and Islamic economics (prohibition of interest and profit-loss sharing), few studies have explored the factors that potentially affect behaviour intentions among customers. This study investigates direct and moderating effects of communication and financial factors on customer attitudes and behavioural intentions towards Islamic banking. Data were collected from the customers of Islamic banks and the Islamic banking divisions of conventional banks in Malaysia using online surveys. The hypotheses were tested using hierarchical regression analysis. The results suggest that relationship marketing, informative advertising, perceived benefits, and profit-loss sharing are important determinants of behavioural intentions among both Muslim and non-Muslim customer groups. This study also found moderating effects for most of the conceptualized moderating variables, particularly attitude interactions with informative advertising, ease of online banking, and the principle of profit-loss sharing. There are both notable similarities and differences in the results for the two customer groups. The findings imply that different strategies should be used both to retain existing customers and attract new ones.     

Whither Islamic Banking?

Islamic banking is visibly on the rise across the globe, supported by a growing clientele, both Muslim and non‐Muslim, although it has yet to demonstrate that it is a viable alternative to conventional banking. Islamic banking is still under the shadow of conventional banking, not only with products that are strikingly similar to those offered by conventional banks, but also with conventional banks having a strong presence as stakeholders in the Islamic banking industry. Islamic banking is still in the early phase of a presumably long evolutionary process, apparently stuck in the initial phase of product differentiation. Islamic banks are competing with conventional banks rather than among themselves, which does not augur well for innovations and creativity, as it tends to keep them preoccupied with modifications of conventional products with Shari'ah compliance. Islamic banks have arrived at a new crossroads. They could either continue on the same path of what may be termed as ‘head‐on competition’ with conventional banks or change their direction in favour of a ‘niche market’ strategy.     

Religion and the Clash of “Ideals” and “Realities” in Business: The Case of Islamic Bonds (Sukuk)

Fueled by an increasing demand for investments that comply with Shariah (Islamic law), sukuk (Islamic investment certificates or participation certificates) have developed as one of the main components of the Islamic finance industry. In general, sukuk can be structured as asset based or asset backed, yielding wholly different risk profiles in the event of default and liquidation. However, given that the sukuk market is dominated by asset‐based sukuk, this article examines the motivation for greater interest in this specific sukuk structure. It also analyzes the challenges facing the regulatory framework and tax implemented for Islamic securitization in various jurisdictions. Then, it further evaluates, from the perspective of credit rating agencies, the importance of purchase undertakings in the structure and some controversies on this very point. The main issue that emerges is the difficulty of resolving the clash between the ideals of Islam and the realities of the marketplace. © 2015 Wiley Periodicals, Inc.     

Waqf,perpetual charity,in a general system theory of tawhidi metascience

This article is premised on the intercausal socioeconomic embedded model of ethical design of perpetual charity in Islam called waqf. Such a model is formalized according to the theory of unity of knowledge in the light of the Primal Ontology of Divine Oneness called Tawhid in the Qur'an. Tawhid is argued to be the only foundational Law of Islam respecting “everything.” The implications of such an epistemic treatment in respect of waqf as an example of the whole class of charities in Islam is shown to be unlike the dissociative and human opinionated nature of what has now come to be known as “shari'ah‐compliance.” The Islamic shortfall of “shari'ah‐compliance” and its segmentation as opposed to organically unified synergy between the socioeconomic and moral/ethical variables of the objective criterion called the Well‐being Function have deprived the entire study of the present days' Islamic economics, finance, and banking from its true epistemological core of Tawhid as Law. To restore this true foundation in Islamic thought, a theory of metascience of Tawhid is presented. Waqf in Malaysia is studied as an example from the perspective of Tawhidi unity of knowledge, contrary to its existing dissociative presence in the ethically exogenous socioeconomic treatment under “shari'ah‐compliance.”     

The impact of proximity within elite corporate networks on the Shariah governance-firm performance nexus: Evidence from the global Shariah elite

Research shows the importance of social networks in the generation of valuable firm resources through informational flows. We extend this conceptualization to Shariah governance and the global Shariah elite as embodied by the Shariah supervisory board. Utilizing a unique dataset of 140 Islamic financial institutions over 2011–2015, across 16 nations, we find that interlocking behavior amongst Shariah supervisory boards is time-invariant and network proximity has an inverted U-shaped curvilinear impact on the performance of Islamic financial institutions. Our findings extend the academic literature on SSB interlocking behavior by disentangling the impact of network proximity on the Shariah governance-firm performance nexus.     

The global financial crisis and Islamic finance

The conventional view holds that the current global financial crisis was caused by extraordinarily high liquidity, reckless lending practices, and the rapid pace of financial engineering, which created complex and opaque financial instruments used for risk transfer. There was a breakdown of the lender‐borrower relationship and informational problems caused by a lack of transparency in asset market prices, particularly in the market for structured credit instruments. There was outdated, lax, or absent regulatory‐supervisory oversight; faulty risk management and accounting models; and the emergence of an incentive structure that not only encouraged excessive risk taking but also created a complicit coalition of financial institutions, real estate developers and appraisers, insurance companies, and credit rating agencies whose actions led to a deliberate underpricing of risk. Such a crisis would not have occurred under an Islamic financial system—due to the fact that most, if not all, of the factors that have caused or contributed to the development and spread of the crisis are not allowed under the rules and guidance of Shariah. The current global financial crisis is largely seen as a real test of the resilience of the Islamic financial services industry and its ability to present itself as a more reliable alternative to the conventional financial system. © 2011 Wiley Periodicals, Inc.     

期权模型在财产保险偿付能力研究中的应用

期权模型已广泛应用于金融保险业。本文将期权定价模型运用于财产保险的偿付能力分析。在保险被视为公司的负债且保险的需求函数与偿付能力不足风险成反比的假设下,可通过选择偿付能力不足风险的水平来实现保险人的利润最大化。     

Problems and challenges facing the islamic banking system in the west: The case of the UK

This study investigates the main problems, challenges, and opportunities facing Islamic banking in the United Kingdom. The study reports the results of interviews that were undertaken with senior officials of several key financial institutions who have had many years of experience in dealing with Islamic banking. Our interviews revealed that, although by strict definition Islamic banks do not currently exist in the UK, London is one of the major centers for Islamic banking and finance. It is apparent that the experience of previously established Islamic institutions, such as Al‐Baraka, has made other institutions realize that it is possible to provide Islamic banking services in the UK under nonbanking regulations. The interviews also revealed that the main problem that Islamic banking faces in the UK is heterogeneous clients and potential clients. Moreover, regulatory hurdles, competition from conventional banks, and lack of adequately qualified and trained personnel exacerbate the situation. The study concludes by identifying opportunities such as e‐banking that may have a significant impact on the future of Islamic banking in the UK. © 2004 Wiley Periodicals, Inc.     

The combination of contracts in Shariah: A possible mechanism for product development in Islamic banking and finance

The combination of contracts is a potential mechanism of product development in Islamic finance. However, this concept encounters legal issues due to ahadith that prohibit two contracts in one deal. The article argues for the validity of combining two or more contracts to structure Shariah‐compliant products. It discusses many aspects of combination of contracts, including terminologies and purposes of the con‐tracts, the degree of uncertainty and ambiguity, and the nature of the bargain in the contracts combined. If the contracts combined pass the tests established by legal prin‐ciples, there will be no legal objection to combine such contracts into one deal. © 2007 Wiley Periodicals, Inc.     

The pre‐eminence of gold and silver as Shariah money

Shariah money is gold and silver, supplied by the market on profit criterion. Everywhere, government inconvertible paper money arose from bankruptcy. A government with balanced budgets would never need it. Imposed by force, inconvertible paper is a taxation mean, highly inflationary, and causes impoverishment. Unjust and bankrupt governments will continue to force this despotic money. Islamic Monetary Economics refutes the idea of money as a policy tool. Fully convertible paper is Shariah compliant. Shariah requires a just government to balance its budgets and restore fully gold and silver as lawful money.     

Conceptualization of the real economy and Islamic finance: Transformation beyond the asset‐link rhetoric

A key factor behind the chronic crises in modern economies is the growing dominance of financialization and the resulting disconnect between the real economy and the financial sector, to which conventional financial industry is a key contributor. In contrast, Islamic finance claims to be real‐economy‐oriented, as all transactions must be asset‐linked (asset‐backed or asset‐based). However, is Islamic Finance based on proper conceptualization of the real economy? What is the real economy and its dynamics? How Islamic finance is interfaced with the real economy? In this article, the claimed real‐economy‐orientation is examined by presenting a conceptualization of the real economy and then evaluating the related discourse accordingly. The analysis presented, especially for noneconomists, exposes a serious gap between the claims about Islamic finance and the real economy it is supposed to advance. Appropriate conceptualization of the real economy can help the industry to be relevant and effective for broader socioeconomic transformation.     

银保合作程度的宏观实证检验与微观机制探讨

文章分析了改革开放30年来银行和保险两大金融行业多类宏观指标相互间的关系和影响,发现银行保险业随着各自发展进入成熟期,其协整关系也越来越明显,但是银行与保险业中财产险和人身险的相互影响的关系是不一致的。通过对全国30个省份的研究发现,银保的比例关系与经济发展程度有一定关系,经济发达地区保险业占比反而较小。实证结论对于银保融合中出于不同动机的不同利益诉求者的决策提供了依据,宏微观结合的方式为银行保险的研究提供了更为广阔的思路。     

The determinants of Islamic bank capital decisions

We report new evidence on the bank and institutional determinants of Islamic bank capital ratios in 28 countries between 1999 and 2013. Overall, we find that smaller, more profitable, and highly liquid Islamic banks are more highly capitalized. Additionally, improvements in the economic and financial environments and market discipline within a country correspond with higher Islamic bank capitalization. The results shed light on the impact that Sharia'a law restrictions have on Islamic banking capitalization. Our findings are most robust to banks that choose to hold capital well in excess of that required by regulators, consistent with traditional capital structure theory. Our results highlight the role that stable economic and political systems play in improving bank capitalization and reducing financial sector risk. By reducing political instability and corruption, improving legal systems, and encouraging access to capital markets, policymakers may incentivize managers to make financing decisions that increase the capitalization of the Islamic banking industry in developing countries.     

The link between corporate social responsibility and customer loyalty: Empirical evidence from the Islamic banking industry

Increased support from customers for Islamic financial services is very important to create resilience and competitiveness in the Islamic banking industry. By highlighting certain social activities, this paper estimates the role of Islamic banks’ CSR in influencing customer loyalty, both individually and through the integrated roles of image, trust, satisfaction, and reputation. These paths explore how CSR makes customers impressed, convinced, satisfied, amazed, and ultimately loyal to Islamic banks. The empirical analysis of partial least square structural equation modeling (n = 283) has shown that CSR directly and positively impacts loyalty. Indirectly, these two aspects have an insignificant relationship through the serial roles of image-reputation and satisfaction-reputation, but significant through the single role of reputation and the serial role of trust-reputation. This study has resulted in an updated prediction model of Islamic banking customer loyalty. The practical implication lies in the importance of developing CSR to generate trust and reputation which ultimately increase customer loyalty toward Islamic banks.     

China: Coming to Grips with the New Global Player

This paper analyses China's economic performance in the last 25 years and discusses its prospect for growth in the future. Exports and investment have been the two driving forces for the high annual GDP growth rates. FDI plays an important role. However, structural issues such as the loss‐making state‐owned firms and the fragile banking industry have to be solved. Monetary policy is complicated by the accumulation of reserves which, however, provide an insurance for the fragile banking system. Property rights, a crucial element in transforming a communist society, are far from being clearly developed. Major policy issues in the future include the correction of the distorted growth process and of the institutional deficits, especially with respect to the rule of law and the lack of democracy.     

Japan's Lost Decade and its Financial System

After briefly explaining the causes of the Japanese asset‐price bubble in the 1980s, this paper analyses why the bursting of the bubble developed into a full‐fledged financial crisis in the late 1990s. In order to cope with this crisis, the Government has injected capital directly into the banking sector and banks have written off enormous amounts of bad loans. However, the Japanese financial sector remains very weak and Japan still faces a number of problems in its financial system. Firstly, the profit margin of banks is too small to cover the increased default risk following the bursting of the bubble, and there are market distortions created by the government‐backed financial institutions and the requirements on new lending to small and medium sized companies. Secondly, banks still have excessive stock investment and crossholding of shares between banks and other companies has weakened the market discipline on entrenched management. Thirdly, the government guarantee of all banking‐sector liabilities should be removed. Once the financial system is stabilised, a risk‐adjusted deposit insurance premium should be introduced so as to strengthen market discipline on banks, and the huge postal saving system should be privatised to create a level‐playing field among deposit taking financial institutions. Besides the foregoing, the weak corporate governance structure of Japanese financial institutions has to be remodelled. The management of banks has shielded themselves by extensive cross‐shareholdings, especially with life insurance companies. There has been extensive mutual provision of capital, most large life insurance companies have weak corporate governance, and many of the large shareholders of banks are life insurance companies. This double gearing between banks and life insurance companies has therefore weakened the market control of Japanese financial institutions.     

Can Islamic banks have their own benchmark?

This paper attempts to answer whether Islamic banks can have their own benchmark rate. In so doing, the paper investigates the nature of the relationship Islamic interbank benchmark rate (IIBR) and its comparable conventional counterpart, London interbank offer rate (LIBOR). The dynamics of the two series are investigated to examine the stability of the spread between IIBR and LIBOR, referred to as ‘Islamic premium’ or ‘piety premium’. The findings suggest that there are both long-term and short-term dynamic relationships between the two rates providing significant evidence of their convergence and co-movement. Our results also show that the existence of the IIBR-LIBOR spread is a reflection of the cost of funding and profit potential of the participating IIBR rate-setters. We find that, in addition to the determinants of the credit spreads, fundamental news of the panel banks are dominant factors driving the ‘piety premium’. We argue that the Islamic banking industry is operating in a global context, where it is highly improbable that its rates can decouple from the global benchmarks. Given that Islamic banking products and their risk return profile are similar to conventional products, arbitrage activities force Islamic rates to converge with the global benchmark rates.     

Permissibility and use of options for hedging purposes in Islamic Finance

The debate concerning permissibility and use of options in Islamic finance is ongoing, and the issue is far from settled. Current analyses on this issue appear to focus on taking of unnecessary risks ( gharar), the perceived lack of a physical asset in an options contract, and the possibility of exploitation of the ignorant. To the extent that these factors are involved, options are not permitted under Islamic teachings (the Shariah). In this article, we investigate whether options may be permitted for hedging purposes in Islamic finance. We use equity options as an example in our analysis. After providing a brief overview of options markets, we review the existing literature and critically examine other work such as the religious decrees (fatwas). We also provide two examples, one each of call and put options, to illustrate the managerial issue of use of options for hedging purposes. Our analysis shows that options may be permitted for hedging purposes in Islamic finance as long as the underlying economic activities are themselves permissible (halal) from an Islamic point of view. The analysis also indicates that one of the key issues is related to unnecessary risk taking. The avoidance or reduction of such risks in hedging situations is largely dependent on the settlement and clearing function of the exchanges trading options, which effectively provides a guarantee of delivery. Mutual consent for entering into or canceling contracts and the issue of intangible assets also play a role in determining if options are permissible under the Shariah. We conclude the article by urging experts of Islamic jurisprudence to understand the theory and mechanics of options and use group ijitihad (consensus opinion of Islamic scholars) in conjunction with academics and experts in financial markets and instruments on this vital issue in contemporary finance for the benefit of the Islamic world as well as those trading with the Islamic world. © 2006 Wiley Periodicals, Inc.