Showing papers in "Islamic Economic Studies in 2019"

A model of the Islamic sovereign wealth fund

Abstract: The purpose of this paper is to propose a model of the Islamic sovereign wealth funds (ISWFs) based on Islamic finance principles to modify the precarious image of SWFs from Muslim countries. The Shariah laws are the cardinal direction for this study.,The authors applied a qualitative research technique that consists of three approaches: exploratory case study approach to critically examine and rank the existing status of SWFs; descriptive analysis; and content analysis to present a model of ISWFs in comparison of conventional SWFs.,The authors propose a model of the “Islamic Sovereign Wealth Funds” based on four key pillars: the major Shariah principles; the Islamic corporate governance framework; the Islamic transparency and disclosure framework; and the Islamic corporate social responsibility framework. Furthermore, the authors argue that the potential effect of the ISWFs on Islamic finance and economy will be positive.,The model is an initial work and idea to convert SWFs from Muslim countries into ISWFs, which required an in-depth policy review by governments.,The findings of the paper are useful for policymakers and governments of the Muslim countries to overcome the issues and criticism on SWFs by converting them in ISWFs.,This paper contributes to the literature related to Islamic finance and sovereign wealth fund by presenting a first model of ISWFs for Muslim countries.

Profit Sharing Investment Accounts--Measurement and Control of Displaced Commercial Risk (DCR) in Islamic Finance

Abstract: The paper highlights some of the key issues and gaps in the supervision of Islamic Banks, and in particular, addresses the supervisory implications of the role of investment account management. One of the key issues in Islamic banking is how to measure and manage the sharing of returns and risks between shareholders and investment account holders (IAH), so that such risk sharing can become an effective tool of risk management in Islamic finance. A methodology for estimating such risk sharing is developed so that the extent of risks shifted (“displaced”) from IAH to shareholders, also referred to as “Displaced Commercial Risk” (DCR), can be measured. Drawing on the recent work on linking the DCR with the “Alpha”, which is the share of risk weighted assets funded by IAH that should be included in the denominator of Capital Adequacy formula for Islamic banks( as recommended in the new IFSB Capital Adequacy standard), the paper presents and illustrates an empirical approach for the supervisory assessment of “Alpha”.

Does doing good pay off? Social impact bonds and lessons for Islamic finance to serve the real economy

Abstract: Purpose – The purpose of this paper is to examine the world’s first social impact bond (SIB) and the lessons that can be learned for the Islamic finance industry to fulfil its true objectives. Design/methodology/approach – The Peterborough SIB was recently announced to be successful in achieving its targeted social and investment outcomes, reducing recidivism by 9 per cent and paying back investors a 3 per cent pa return. The paper compares Peterborough SIB with socially responsible investment (SRI) sukuk in terms of form and substance, and finds that there are various lessons from the Peterborough SIB that can be useful for future development of Islamic financial products. Findings – Innovative social financial tools such as SIB exemplify the true spirit of risk sharing and social responsibility, which is arguably missing in current practices of the Islamic finance industry. With the growing interest towards SRI strategies and increase in socially motivated investors, such financial tools may not only help the sustainable growth of the Islamic finance industry, but also fill in the gap between its theory and practice. Practical implications – As such, the paper also proposes a social impact sukuk model which integrates the key aspects learned from Peterborough SIB. This includes prioritising social impact, measurable success indicators, data and management systems, flexible contracts, third sector integration, risk sharing and fostering the culture of innovation. Originality/value – The findings can offer some practical insights in dealing with the issue of Islamic finance practice being overly concerned with its formal adherence with Islamic legal rules whilst neglecting its true fundamental values.

Innovative solutions to tap “Micro, Small and Medium Enterprises” (MSME) market: A way forward for Islamic banks

Abstract: The purpose of this paper is to indicate an innovative solution to address the financing issues faced by “Micro-, Small and Medium Enterprises” (MSME) in emerging economies.,Islamic Financial Institutions (IFIs) especially Islamic banks are competing for high net worth individuals, whereas the MSME sector is largely untapped. A collaborative model for IFIs is suggested, to explore the MSME sector. Islamic Non-Banking Financial Institutions (NBFIs) are operating in these markets through their extensive gross route networks. The multistep collaborative model proposes “Special Purpose Entity (SPE)” partially owned by a single Islamic Bank or consortium and NBFI/s. SPEs can be incorporated with a defined scope, focus areas, risk profile, budget and shareholding patterns.,Risk and profit sharing instruments also known as Musharakah and Mudarabah have less than 6 percent share within total financing offered by Islamic banks globally. Risk sharing products offered by Islamic banks are not targeting this sector due to the underdevelopment of instruments, lack of knowledge and resources. Proposed SPEs can operate regionally with a concentration on specific business sectors.,The SPE model would enable Islamic banks to enter the huge MSME market while mitigating risk. On the contrary, it would enable the large segments of emerging economies (bottom 40 percent population of developing nations) to get involved and actively play their role to attain long-term development goals.

Co-Movement and Volatility Transmission between Islamic and Conventional Equity Index in Bangladesh

Abstract: Though the issues of co-movement and volatility transmission between Islamic and conventional stock indices have been extensively studied worldwide, this is the first study in reference to Bangladesh to the best of our knowledge. The broad objective of this paper is to investigate whether Islamic stock index provides more diversification benefits than the conventional index from the perspective of cointegration and volatility spillover employing ARDL bounds testing cointegration procedure and GARCH family models. This study uses daily conventional (DS30) and Islamic (DSES) indices from the Dhaka Stock Exchange over the period from 20 January 2014 to 25 June 2018. Typically longer series of data are used in stock market research; however, this study is constrained to take only four and a half years of daily data as Islamic stock index in Bangladesh launched only just in January 2014. The results from ARDL bounds testing and error correction modeling show that both the markets are interlinked in the short-run and long-run. Since two markets move together in the long and short-run, one can predict its future price using any of the index prices. Univariate GARCH(1,1) model finds evidence of volatility clustering in both index returns which have a tendency to last a long time. The results of the EGARCH(1,1) model reveal that both markets are more sensitive to the bad news than with good news. Employing a bivariate GARCH-BEKK model, we find the existence of significant volatility transmission from conventional to Islamic stock market in Bangladesh. Results of GARCH-CCC framework show the evidence of strong direct interconnections between the markets. Finally, we test the presence of time-varying correlation between markets applying the GARCH-DCC model, and the results reveal that correlations are not only conditional but also significantly time-varying. The result also shows that the correlation process is mean reverting. Therefore, we conclude that conventional and Islamic stock markets in Bangladesh do not offer any diversification benefits to investors having both indices in their portfolios. Hence, faith-based investors and portfolio managers should add in other categories of assets in their portfolios to mitigate risk.

Achieving Sustainable Impact of Zakāh in Community Development Programs

Abstract: Zakāt Community Development (ZCD) Program is one of the featured programs initiated by Indonesia National Board of Zakāt in empowering the community and prioritizing the fulfillment of people's capacity and skills as a basis for mobilizing people and making changes. More than a hundred communities, which are represented at village level, have been chosen to benefit from the program since last year. In practice, the ZCD program has various fields in economic, spiritual, social, educational, and health activities to improve the living standards of the mustahik. The beneficiaries of the program are also expected to be self-reliant and be able to spread the inspiration to those around them so as to make the impact of zakāt long term. This study is conducted to examine the sustainable impact of zakāt toward the welfare of mustahik living in a community. By using mixed methods, the indicator of sustainable impact is derived from the Sustainable Development Goals (SDGs). The assessment or evaluation indicator is developed specifically to determine whether the communities are suitable to benefit from ZCD programs. It is also necessary to measure the outcome of the program from the perspective of sustainability This study shows that conceptually zakāt and SDGs have significant relevance. It is because zakāt is an instrument of Islamic economic development which places the Maqāṣid al-Sharī‘ah as its implementation goal. Because of its narrower scope compared to the Maqāṣid al-Sharī‘ah, SDGs can be used as a reference indicator for zakāt to fulfil the purpose of development which is reflected in Maqāṣid al-Sharī‘ah. Furthermore, from samples of ZCD programs in some selected villages, it has been found that communities of mustahik are able to scale up their welfare by utilizing the zakāt programs. Some of them have successfully created new productive activities which transform their status from mustahik to muzakki. Interestingly, these achievements are not only for those who receive zakāt, but also for non-recipients who are living in the same community that gets involved in the programs.

Does doing good pay off

Abstract: Purpose – The purpose of this paper is to examine the world’s first social impact bond (SIB) and the lessons that can be learned for the Islamic finance industry to fulfil its true objectives. Design/methodology/approach – The Peterborough SIB was recently announced to be successful in achieving its targeted social and investment outcomes, reducing recidivism by 9 per cent and paying back investors a 3 per cent pa return. The paper compares Peterborough SIB with socially responsible investment (SRI) sukuk in terms of form and substance, and finds that there are various lessons from the Peterborough SIB that can be useful for future development of Islamic financial products. Findings – Innovative social financial tools such as SIB exemplify the true spirit of risk sharing and social responsibility, which is arguably missing in current practices of the Islamic finance industry. With the growing interest towards SRI strategies and increase in socially motivated investors, such financial tools may not only help the sustainable growth of the Islamic finance industry, but also fill in the gap between its theory and practice. Practical implications – As such, the paper also proposes a social impact sukuk model which integrates the key aspects learned from Peterborough SIB. This includes prioritising social impact, measurable success indicators, data and management systems, flexible contracts, third sector integration, risk sharing and fostering the culture of innovation. Originality/value – The findings can offer some practical insights in dealing with the issue of Islamic finance practice being overly concerned with its formal adherence with Islamic legal rules whilst neglecting its true fundamental values.

Performance of initial public offerings (IPOs): the case of Shariah-compliant companies

Abstract: The purpose of this paper is to examine the informational value of Shariah-compliant disclosure in the Malaysian initial public offerings (IPOs) prospectus and whether Shariah-compliant status has an impact on the IPO initial return when adopted as a signalling mechanism.,It uses data from 320 IPOs for Shariah-compliant companies listed on the Bursa Malaysia between 2004 and 2013.,It finds that the degree of IPO underpricing for Shariah-compliant companies is 19.97 per cent with investors earning significant returns on the first trading day. For the effect of different factors on the degree of IPO, we find that the size and type of IPO offers have a significant impact on the degree of IPO underpricing. Other economic confidence factor models fail to yield economically plausible parameter values.,The study contributes to the literature in a number of ways. It is the first to evaluate the effect of Shariah-compliance status regulation in Malaysian market, hence it provides an insight into the effectiveness of such regulation. Second, while the existing Shariah-compliant IPO studies in the same market focus on Shariah status at the date of the studies being conducted, this study uses the information around IPO time. The information that investors receive around IPO time may influence investors’ decision and valuation of the IPOs in the aftermarket. Specifically, this study is different from the previous research, as it investigates whether Shariah-compliant companies would change the average degree of IPO underpricing for companies listed on Bursa Malaysia.

Reciprocity, self-interest and reputation: debt vs equity contracts

Abstract: The purpose of this paper is to examine whether reputation element affects the decision relative performance of trust, bonus and incentive contracts using social laboratory experiments.,The study conducts the following lab experiments bonus–incentive treatment without reputation, bonus–incentive treatment with reputation and trust–incentive treatment with reputation.,The study finds that the reputation and fairness concerns, in contrast to self-interest, may have a decisive impact on the actual and optimal choices in the reciprocity-based contracts. The principal pays higher salaries in the bonus contract as compared to an incentive contract.,The study contributes to the behavioral economic literature in the following dimensions. The existing literature on lab experiments considers a bonus contract as better than the debt contract; however, it does not consider the trust contract better than the debt contract.

A Structural Model for Human Development, Does Maqāṣid al-Sharīʿah Matter!

Abstract: Islamic scholars agree that Islam has the ultimate goal of being a mercy to humanity. This is, in fact, the primary purpose of Maqāṣid al-Sharīʿah. To achieve this goal, it is necessary to promote human well-being. The main purpose of this study is to test how Maqāṣids’ al-Sharīʿah contribute to promote human welfare. We use a partial least squares-path model that allows us to identify the causal relationships between Maqāṣid al-Sharīʿah components proposed by Al-Ghazali (Ḥifẓ al-Nafs, Ḥifẓ al-Dīn, Ḥifẓ al-ʿAql, Ḥifẓ al-Māl, Ḥifẓ al-Nasl) and their impact on human well-being. Using a sample of 30 Islamic countries, our empirical results show that dimensions used for Maqāṣid al-Sharīʿah objectives are homogeneous and representative. Globally, we find that Maqāṣid al-Sharīʿah contribute significantly to human well-being in Islamic countries. We show that Ḥifẓ al Nafs and Ḥifẓ al Dīn are the most significant components that affect human well-being. While we find evidence that Ḥifẓ al ʿAql didn’t have a significant impact on human development index. This may be due to other factors that can affect the quality of life in some Islamic countries such as the effect of natural resource wealth.