This paper discusses Islamic banking products and interprets them in the context of financial intermediation theory. Anecdotal evidence shows that many of the conventional products can be redrafted as Sharia-compliant products, so that the differences are smaller than expected. Comparing conventional and Islamic banks and controlling for other bank and country characteristics, the authors find few significant differences in business orientation, efficiency, asset quality, or stability. While Islamic banks seem more cost-effective than conventional banks in a broad cross-country sample, this finding reverses in a sample of countries with both Islamic and conventional banks. However, conventional banks that operate in countries with a higher market share of Islamic banks are more cost-effective but less stable. There is also consistent evidence of higher capitalization of Islamic banks and this capital cushion plus higher liquidity reserves explains the relatively better performance of Islamic banks during the recent crisis.

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

The relative financial strength of Islamic banks is assessed empirically based on evidence covering individual Islamic and commercial banks in 19 banking systems with a substantial presence of Islamic banking. We find that (a) small Islamic banks tend to be financially stronger than small commercial banks; (b) large commercial banks tend to be financially stronger than large Islamic banks; and (c) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks. We also find that the market share of Islamic banks does not have a significant impact on the financial strength of other banks.

/pdf/islamic-banks-and-financial-stability-an-empirical-analysis-15zgaz1iwz.pdf

Islamic Banks and Financial Stability: An Empirical Analysis

A unique feature of Islamic banking, in theory, is its profit-and-loss sharing (PLS) paradigm. In practice, however, we find that Islamic banking is not very different from conventional banking. Our study on Malaysia shows that only a negligible portion of Islamic bank financing is strictly PLS based and that Islamic deposits are not interest-free, but are closely pegged to conventional deposits. Our findings suggest that the rapid growth in Islamic banking is largely driven by the Islamic resurgence worldwide rather than by the advantages of the PLS paradigm and that Islamic banks should be subject to regulations similar to those of their western counterparts.

/pdf/islamic-banking-interest-free-or-interest-based-czwx2lkrl8.pdf

Islamic banking: Interest-free or interest-based?

This paper investigates risk and stability features of Islamic banking using a sample of 553 banks from 24 countries between 1999 and 2009. Small Islamic banks that are leveraged or based in countries with predominantly Muslim populations have lower credit risk than conventional banks. In terms of insolvency risk, small Islamic banks also appear more stable. Moreover, we find little evidence that Islamic banks charge rents to their customers for offering Sharia compliant financial products. Our results also show that loan quality of Islamic banks is less responsive to domestic interest rates compared to conventional banks.

https://hal-unilim.archives-ouvertes.fr/hal-00915115/document

Risk in Islamic Banking

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

This study examines the relationship between asset liquidity and stock liquidity across 47 countries. In support of the valuation uncertainty hypothesis, we find that firms with greater asset liquidity on average have higher stock liquidity. More importantly, our study shows that asset liquidity plays a more significant role in resolving valuation uncertainty in countries with poor information environment. For example, we find that the asset�stock liquidity relationship is stronger in countries with poor accounting standards. We further find evidence that after the adoption of IFRS, the improved accounting information environment results in a weaker asset�stock liquidity relation, but only in countries with a strong legal regime. Finally, our study shows that the positive asset�stock liquidity relationship may be attributed to transparency and/or liquidity reasons.

/pdf/asset-liquidity-and-stock-liquidity-international-evidence-4bdn1nnmyz.pdf

Asset Liquidity and Stock Liquidity: International Evidence

We examine the relation between lockup length and voluntary earnings forecast disclosures for IPOs in Singapore. Unlike firms in the United States, companies in Singapore are allowed to provide earnings forecasts in their IPO prospectuses. We find that forecasters are more likely to accept longer lockup periods, so that the lockup expires after the first post-IPO earnings announcement. Our study also shows that because the lockup agreement removes personal incentives to issue aggressive forecasts, IPO firms tend to issue conservative forecasts. Overall, our results suggest that the lockup mechanism adds credibility to the earnings forecast given in the IPO prospectus.

Lockup and Voluntary Earnings Forecast Disclosure in IPOs

We examine the relation between lockup length and voluntary earnings forecast disclosures for IPOs in Singapore. Unlike firms in the United States, companies in Singapore are allowed to provide earnings forecasts in their IPO prospectuses. We find that forecasters are more likely to accept longer lockup periods, so that the lockup expires after the first post-IPO earnings announcement. Our study also shows that because the lockup agreement removes personal incentives to issue aggressive forecasts, IPO firms tend to issue conservative forecasts. Overall, our results suggest that the lockup mechanism adds credibility to the earnings forecast given in the IPO prospectus. In this study, we examine the relation between the length of the lockup period and voluntary earnings forecast disclosures for IPOs in Singapore. Lockup agreements in Singapore, like those in the United States, prohibit pre-IPO shareholders from selling their shares for a period after the IPO. However, unlike in the United States, firms in Singapore that are going public are allowed to provide earnings forecasts in their IPO prospectuses. This unique feature in the Singapore IPO process makes it possible for us to examine how lockup lengths are related to voluntary earnings forecast disclosures.

https://www.jstor.org/stable/pdfplus/30136009.pdf

This paper examines the debt ownership structure of firms with corporate governance problems associated with the divergence in the controlling shareholders' voting and cash-flow rights. Previous studies suggest that debt can play an important role in mitigating corporate governance problems. However, not all debt can effectively manage the corporate governance problems associated with the financing of poorly governed firms. In this study, we find that firms with higher divergence in voting and cash-flow rights use significantly more bank debt financing. Moreover, the effect of the divergence in voting and cash-flow rights on the use of bank debt is greater in countries with weaker legal protection for investors. Overall, our findings suggest that bank debt has a comparative advantage in financing poorly governed firms.

The impact of divergence in voting and cash-flow rights on the use of bank debt

By setting the stage for universal banking in Japan, the Financial System Reform Act (FSRA) of 1992 has tremendous implications for the competitiveness, efficiency, and stability of the Japanese financial services industry. This study examines the effects of the FSRA on the risks and returns of Japanese commercial banks, long-term credit banks, trust banks, and securities firms. Using an event study methodology, the results of this study show that universal banking in Japan has significant effects on the risks and returns of financial institutions. Universal banking, in particular, increases the Japanese financial institutions' exposure to market risk, but lowers their exposure to interest rate risk. The evidence also supports the argument of Posner (1974) and Peltzman (1976) that there are inter-industry differences to the effects of regulation. Among the Japanese financial institutions examined, only the trust banks and the securities firms seem to benefit from the FSRA in terms of increased returns.

Beng Soon Chong

Papers

Asset Liquidity and Stock Liquidity: International Evidence

Lockup and Voluntary Earnings Forecast Disclosure in IPOs

Lockup and Voluntary Earnings Forecast Disclosure in IPOs

The impact of divergence in voting and cash-flow rights on the use of bank debt

The impact of universal banking on the risks and returns of Japanese financial institutions