Financial stability of Islamic banking and the global financial crisis: Evidence from the Gulf Cooperation Council

Using a sample of 76 banks from the Gulf Cooperation Council region, we use accounting- as well as market-based measures of financial stability to examine whether Islamic banks outperformed conventional banks in the time of financial shocks during the period 2000–2013. We find that the difference between the two banking types was initially not significant during the GFC. However, when the financial shock spread to the real economy during the later phases of the crisis, Islamic banks suffered a significantly higher level of financial instability than conventional banks. This result holds true for large banks but not for small Islamic banks. Small Islamic banks demonstrated a relatively better handling of the economic downturn than large Islamic banks, supporting the argument that Islamic banks are more stable when they operate at a small scale but lose this stability when they increase their scale of operations. Hence, while Islamic banks may have escaped the consequences of highly volatile financial instruments, they were not spared from a major shock in the real economic sectors.     

ISLAMIC BANKING AND FINANCE: RECENT EMPIRICAL LITERATURE AND DIRECTIONS FOR FUTURE RESEARCH

This paper examines the recent empirical literature in Islamic banking and finance, highlights the main findings and provides a guide for future research. Early studies focus on the efficiency, production technology and general performance features of Islamic versus conventional banks, whereas more recent work looks at profit‐sharing and loss‐bearing behaviour, competition, risks as well as other dimensions such as small business lending and financial inclusion. Apart from key exceptions, the empirical literature suggests no major differences between Islamic and conventional banks in terms of their efficiency, competition and risk features (although small Islamic banks are found to be less risky than their conventional counterparts). There is some evidence that Islamic finance aids inclusion and financial sector development. Results from the empirical finance literature, dominated by studies that focus on the risk/return features of mutual funds, finds that Islamic funds perform as well, if not better, than conventional funds – there is little evidence that they perform worse than standard industry benchmarks.     

Structural changes,competition and bank stability in Malaysia’s dual banking system

This paper assesses Malaysia’s competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.     

Is there a diversification “cost” of Shari’ah compliance? Empirical evidence from Malaysian equities

Islamic equity portfolios work with a smaller investment universe given the filtering of non-Shari’ah compliant stocks. It has been theoretically argued that this culminates in suboptimal portfolio diversification, which in turn adversely affects risk-adjusted returns. We offer empirical evidence that such a conceived portfolio diversification “penalty” is far from a foregone conclusion, at least empirically. Our results tend to indicate that Islamic portfolios are not invariably handicapped in terms of portfolio diversification. We also explored dimensions that may account for differences in the relative investment performance between Islamic and conventional portfolios, such as portfolio constraints, short selling and market conditions. We believe this paper is among the first to apply substantial empirical analysis specifically with respect to the portfolio diversification perspective on Islamic equity investments.     

Predictability dynamics of Islamic and conventional equity markets

This study undertakes the challenging task of comparing the weak form efficiency of conventional and Islamic equity markets. Using 12 different Dow Jones indexes that cover 16 years of daily data, we compare the time-varying non-linear predictability patterns of conventional market indexes and their Islamic counterparts at country and continent level by using permutation entropy. Accordingly, we find that all indexes in our analysis have different degrees of time-varying predictability and all conventional markets are found to be more efficient compared to their Islamic counterparts. However, in some of the cases, this difference in efficiency is almost indistinguishable. Our findings reveal that compared to their conventional counterparts, Islamic markets do not necessarily need to carry a more deterministic or predictable structure since efficiency in these markets depends mostly on liquidity, market quality, institutional characteristics and the country/continent specific investment behavior.     

Building,Marketing and Living in an Islamic Gated Community: Novel Configurations of Class and Religion in Istanbul

This article analyses the development and marketing of Islamic gated communities in Basaksehir, Istanbul. It demonstrates how a blueprint of public–private urban development was appropriated by middle‐class Islamists. The gated communities in Basaksehir—which, at the outset, were not explicitly religious—gradually became attractive to religious actors searching for enclosed urban enclaves where Islamic communities would be protected against perceived moral‐urban threats. While urban‐religious enclaves appear to bear similarities to pre‐modern Ottoman Islamic urban enclaves, the rise of contemporary Islamic gated communities should be understood in light of the recent coming to power of the Islamist Turkish government. In cooperation with this government, housing development agencies approached Islamic investors to find capital for their public–private housing projects. One of the results of this form of urban development is that, contrary to pre‐modern Ottoman Islamic urban enclaves, the Islamic gated communities are homogenous in terms of economic class, catering specifically to the Islamic middle classes. Moreover, people who invest in Basaksehir desire an urban‐religious lifestyle that differs from the ‘traditional' religious lifestyle experienced in ‘traditional' Islamic neighbourhoods. The specific urban‐religious configuration generates a new type of Islam that better fits middle‐class values and a middle‐class lifestyle.     

Impact of COVID-19 pandemic on stock markets: Conventional vs. Islamic indices using wavelet-based multi-timescales analysis

We empirically explore the effect of the COVID-19 pandemic on Islamic and conventional stock markets from a global perspective. We also explore the co-movement between Islamic and conventional stock markets. Two comparable pairs of conventional and Islamic stock indices – Dow Jones Index and FTSE Index are considered in this study. Employing Wavelet-based multi-timescales techniques on the daily data from 21st January to 27th November 2020, our findings indicate that the pandemic creates identical volatility in both stock markets. Our findings further suggest that both markets are strongly associated and tend to co-move highly during our sample period, rebutting the decoupling hypothesis of the Islamic stock market from the conventional market. However, the Shariah screening process fails to provide immunity to Islamic stock markets against financial crises. Our findings suggest that investors should be aware that Islamic stocks' conservative features do not present a superior investment alternative, especially in economic turmoil.     

Market integration between conventional and Islamic stock prices

The paper assesses the market integration between conventional and Islamic stock prices from the long- and short-run perspectives for France, Indonesia, the UK and the US from September 8, 2008 to September 6, 2013 using various econometric approaches. The results show long-run relationships for all countries, except for the UK where there is no cointegration between conventional and Islamic stock prices. These findings suggest that the Islamic finance industry in the considered economies (except the UK) does not seem to be compliant to Islamic law's maxims, which hinders portfolio managers and market participants to benefit from the opportunities of international diversification and hedging effectiveness. From the correlation perspective, there is evidence of weak linkages between the Indonesian market and the developed markets for both conventional and Islamic stock prices, thus suggesting that investors can diversify their portfolios at the international level to minimize risk. However, there is high connection between the developed markets for both conventional and Islamic indexes. In addition, for each economy, the Islamic index is found to be strongly linked with its conventional counterpart. The structural change analysis reveals common break dates for several cross correlations, thus reflecting the similar time-paths of the interactions between markets. The presence of breaks in the inter-market linkages has important implications for international investors as regards portfolio diversification benefits and for financial policy makers regarding contagion risks and market policies.     

Islamic equity market integration and volatility spillover between emerging and US stock markets

The purpose of this paper is to study the conditional correlations across the US market and a sample of five Islamic emerging markets, namely Turkey, Indonesia, Pakistan, Qatar, and Malaysia. The empirical design uses MSCI (Morgan Stanley Capital International) Islamic equity index since it applies stringent restrictions to include companies. Indeed, two main restrictions must be met: (i) the business activity must be compliant with Shari’ah (i.e., Islamic law) guidelines and (ii) interest-bearing investments and leverage ratios should not exceed upper limits. Three models are used: multivariate GARCH BEKK, CCC, and DCC. The estimation results of the three models show that the US and Islamic emerging equity markets are weakly correlated over time. No sheer evidence supports that the US market spills over into the Islamic emerging equity markets. Besides interpreting the results in terms of weak market integration, the peculiar specificities of the Islamic finance industry and the admittance conditions to the MSCI Islamic equity index contribute to explaining them. Indeed, Islamic finance bans interest-bearing investments and imposes some rules, such as asset-backing, which has sizeable impacts on volatility spillover and shocks transmissions, alongside with the close linkage between real and financial sectors. These findings suggest that investors should take caution when investing in the Islamic emerging equity markets and diversifying their portfolios in order to minimize risk.     

基于产业招商的西北地区清真循环经济产业链的构建——以宁夏清真产业发展为例

文章以宁夏清真产业发展为例,在分析西北地区清真产业现状的基础上,提出通过清真产业招商解决西北地区清真产业生产工艺落后、技术含量低、研发创新能力弱的问题,构建了基于产业招商的清真循环经济产业链模型。     

Do Islamic Banks Employ Less Earnings Management?

In this article, we examine whether Islamic banks are less likely to manage their earnings than non‐Islamic banks and how Islamic banks’ unique corporate governance system, especially Shari'ah Supervisory Boards, impacts earnings management behaviors within Islamic banks. Using a sample of Islamic banks and their matched non‐Islamic banks in 15 countries, we find that, first, Islamic banks are less likely to conduct earnings management as measured by both earnings loss avoidance and abnormal loan loss provisions. Second, there are no significantly different earnings management behaviors between Islamic banks with and without Shari'ah Supervisory Boards. Third, several Shari'ah Supervisory Board characteristics, such as size and the presence of members from Auditing Organization for Islamic Financial Institutions, are important determinants of the earnings management of Islamic banks who have Shari'ah Supervisory Boards.     

Human Vicegerency and the Golden Rule: The Islamic Case Against Exclusion

The Islamic conception of social exclusion complements the Catholic perspective found in other contributions to this issue. The Islamic prohibitions of social exclusion are derived from theological principles that combine to provide a metaphysical basis for the golden rule that one should treat others as one wishes to be treated. This article examines the roots of a practical morality that enjoins us to treat other people as equals and prohibits exploitation of them in economic exchange. This philosophy is based on four principles found in the Qur'an and the hadith (teachings of the Prophet): vicegerency, commensurability, responsibility, and prophecy. These four principles combine to show how humans, as God's agents on earth, have the means to carry out the divine will. The practice of justice in Islamic thought does not rely on social conventions that are variable and contingent but on absolute principles revealed to us by the Prophet. That gives Islam an advantage over secular thought in establishing a strong foundation for social and ethical principles that give egalitarianism a transcendent basis. Thus, social inclusivity in Islamic thought is an integral part of a life governed by piety and prophecy.     

Cyclicality of bank credit growth: Conventional vs Islamic banks in the GCC

Using a panel of 104 banks from the six Gulf Council Countries, we investigate the cyclicality of credit growth with regard to the discrepancies between Islamic banks and conventional banks. We found that Islamic banks are pro-cyclical and have higher credit growth compared to conventional banks. Indeed, the Profit and Loss Sharing (PLS) mechanism helps Islamic banks not to curb their credit growth during adverse economic conditions. We tested the role of the growth rate of market sentiment and found that positive market sentiment leads to higher bank credit growth. Furthermore, we investigate the impact of several bank-specific variables on bank credit growth and discuss to what extent diversification and the investment portfolio reshape the credit growth process.     

Dependence dynamics of Islamic and conventional equity sectors: What do we learn from the decoupling hypothesis and COVID-19 pandemic?

The recent COVID-19 pandemic intensification generates a different set of challenges for global financial markets and portfolio management strategies. This paper uses network analysis to investigate the static and dynamic dependence within Islamic and conventional equity sectors. The study focuses on the decoupling hypothesis and how the dependence among sectors changes during COVID19. Empirical findings indicate a higher degree of spillover during the COVID19 sub-period. Islamic and conventional equities behave differently in terms of industry-level dependence during normal and crisis times, thus decoupling. Further, the dependence effect between conventional equity returns is stronger than Islamic equity returns during the COVID-19 pandemic. The finding of this paper has several significant implications for portfolio selection and risk management. Portfolios consisting of Islamic equity sectors including industrials, basic materials, consumer services, and technologies highlight low-diversification benefits across the entire sample period. Also, investment exposure to less connected Islamic and conventional equity sectors provides a good diversification strategy.     

Profit distribution management by Islamic banks: An empirical investigation

The objective of this paper is to ascertain whether Islamic banks do in fact manage profit distributions and if so, what factors are associated with the extent of profit distribution management. The results suggest that most Islamic banks manage profit distributions, with the extent of profit distribution directly related to religiosity, financial development, asset composition, and existence of discretionary reserves, while it is inversely related to market familiarity with Islamic banking, market concentration, depositor funding reliance and the age of the Islamic bank.     

Impact of the COVID-19 outbreak and its related announcements on the Chinese conventional and Islamic stocks’ connectedness

In this paper, we assess the impacts of the COVID-19 counts (infected cases, deaths and recovered) and related announcements on the Islamic and conventional stocks interplays in the Chinese market. We test whether Islamic stocks are perceived as assets providing diversification benefits in time of COVID-19 pandemic. Doing so, we implement a multivariate GJR-GARCH model under dynamic conditional correlation (DCC) as well as multiple and partial wavelet coherence methods to recent Chinese daily data ranging from 2 December 2019 to 8 May 2020 and COVID-19 related announcement for the period. Our results from multivariate GJR-GARCH models reveal that COVID-19 infected cases and deaths do impact mean DCCs between Islamic and conventional stocks, number of recovered do not have such impact, while none of the above have any significant impact on the DCCs fluctuations. However, when we analyze the impact of COVID-19 related announcement on the variation of conditional correlation between two stocks (i.e. DCC volatility) our findings show that 7 out of 10 such announcements (mainly those with serious health treats or economic implications) do effect those volatilities in Chinese equity market. The empirical findings from partial and multiple wavelet coherences provide robust evidence of instability in the co-movement between Islamic and conventional indexes for different scales and over dissimilar sub-periods. Indeed, the weakening of co-movements is especially notable in the very short and short-run where operating the short-term investors. Our empirical findings offer several key propositions for policy makers and portfolio managers in China with broad implications applicable to other markets.     

Efficiency in Islamic and conventional banking: an international comparison

The paper investigates the efficiency of a sample of Islamic and conventional banks in 10 countries that operate Islamic banking for the period 1996–2002, using an output distance function approach. We obtain measures of efficiency after allowing for environmental influences such as country macroeconomic conditions, accessibility of banking services and bank type. While these factors are assumed to directly influence the shape of the technology, we assume that country dummies and bank size directly influence technical inefficiency. The parameter estimates highlight that during the sample period, Islamic banking appears to be associated with higher input usage. Furthermore, by allowing for bank size and international differences in the underlying inefficiency distributions, we are also able to demonstrate statistically significant differences in inefficiency related to these factors even after controlling for specific environmental characteristics and Islamic banking. Thus, for example, our results suggest that Sudan and Yemen have relatively higher inefficiency while Bahrain and Bangladesh have lower estimated inefficiency. Except for Sudan, where banks exhibits relatively strong returns to scale, most sample banks exhibit very slight returns to scale, although Islamic banks are found to have moderately higher returns to scale than conventional banks. While this suggests that Islamic banks may benefit from increased scale, we would emphasize that our results suggest that identifying and overcoming the factors that cause Islamic banks to have relatively low potential outputs for given input usage levels will be the key challenge for Islamic banking in the coming decades.     

The unique twin approaches of Sufi Sheikhs and host-guest relationships at El Sayed Ahmed El-Badawy Mosque in Egypt

Quality & Quantity - Research on the effects of religious hosts’ interpretations, faith expressions, and interactions with tourists of different religious beliefs at Islamic religious...     

Cost and profit efficiency of conventional and Islamic banks in GCC countries

Using stochastic frontier approach, this paper investigates the cost and profit efficiency levels of 71 commercial banks in Gulf cooperation council countries over the period 1999–2007. This study also conducts a comparative analysis of the efficiency across countries and between conventional and Islamic banks. Moreover, we examine the bank-specific variables that may explain the sources of inefficiency. The empirical results indicate that banks in the Gulf region are relatively more efficient at generating profits than at controlling costs. We also find that in terms of both cost and profit efficiency levels, the conventional banks on average are more efficient than Islamic banks. Furthermore, we observe a positive correlation of cost and profit efficiency with bank capitalization and profitability, and a negative one with operation cost. Higher loan activity increases the profit efficiency of banks, but it has a negative impact on cost efficiency.