Critical issues on Islamic banking and financial markets : Islamic economics, banking and finance, investments, Takaful and financial planning

This book examines the principles and practices ofIslamic banking and financial markets, particularly from the Malaysian experience. The main objective of Islamic financial system is to govern the flow of funds from the surplus sector to the deficit sector and it does so to promote justice ('adalah). That is, by adhering to Shariah principles and achieving efficiency - doing the right thing and doing it right, public and private interest interests are can both be protected. By doing so, the legal and moral dimensions of product design and development are now equally important. In this way halal status should not discount how Islamic products affects general economic activities. It means that Shariah advisors should not only approve Shariah complaint products along the juristic plane but dutifully consider how the products can affect income disparities and poverty, economic stability and growth. For this reason, the principle of risktaking (ghorm) and the principle of work (kasb) and the principle of liability, accountability, responsibility (daman) are paramount in determining Shariah legitimacy of profits and earnings derived from Islamic financial transactions. Risk (ghorm), work (kasbh) and liability (daman) constitute the essence of trading and commerce (ai-bay') the Holy Quran has enjoined over usury (riba). By risk, it means allowing capital to depreciate and appreciate as dictated by the market forces. By work, it refers to value-additions namely, knowledge and skills imparted into the business process. Liability means the responsibility each party must assume in the contract such as providing warranties on the goods and services sold. Based on these principles ofrisk, work and responsibility, also known as the principle of equivalent countervalue ('iwad), the ethical and moral dimension of Islamic fmancial transactions can be realized and thus promote the sense of justice the Quran attempts to convey. It helps people take a second-look at financial products that have received Shariah compliant status and help control potential duplication of interestbearing products bearing the Islamic label

JURISTIC VIEWPOINTS ON BAYC Al-CINAH IN MALAYSIA: A SURVEY

In Malaysia, Sharicah scholars at the supervisory levels have advocated bayc al-cinah as a mode of finance. Under the label of al-bayc, the contract of bayc al-cinah contains interest-bearing features, such as earning a contractual return without the implication of risk and value-addition. Seeking a broader consensus on the permissibility of bayc al-cinah is thus critical. This study shows that Malaysian Sharicah scholars outside the supervisory bodies do not fully support bayc al-cinah. The survey indicates that bayc al-cinah can be applied under a state of darurah or when the maslahah of the Muslim people is under threat, which is not the case in Malaysia. Since Sharicah scholars in Middle-Eastern countries have condemned bayc al-cinah, it is crucial that a diversification policy is pursued to invite greater participation of global Islamic funds in Malaysia.JEL classification: G10, Z12Key words: Islamic financing, Bayc al-cinah, Rib

Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators

The financial and banking crises around the world have prompted the regulators to revise, among others, the capital level of the banks to deal with the excessive risks taken by the banks, both conventional and Islamic. This study is the first attempt to investigate the relationship between risky assets and capital level in a mixed banking system applying the panel VECM and dynamic GMM estimators. The Malaysian mixed banking system is used as a case study taking panel data covering the period from December 2006 to October 2013. Our statistical results based on dynamic OLS (DOLS) tend to indicate that there is a positive relationship between the capital ratio (CAR) and risk weighted asset ratio (RWA) in the long run and also, the causality analysis based on panel VECM and two-step dynamic System GMM tends to indicate unidirectional causality in that the RWA is positively driven by CAR. Our results appear to suggest that higher capital buffer (excess capital above regulatory capital requirement) might have opened up more space for bank managers to taking risky positions while assisted by increasing domestic demand for credit facilities under favorable economic condition of Malaysia. In other words, high capital growth and capital buffer provides an extra cushion for Malaysian banks to pursue relatively riskier financing activities. For the full-fledge Islamic banks (IB) and Islamic bank subsidiaries (IBS), the existence of a cointegrating relationship between RWA and CAR suggests that the way the managers of Islamic banks behave towards risky assets follows the conventional practice

What Drives Profitability of Banks: Do Interest rate, and Fee and Commissions impact the profitability of Banks? Evidence from the European Countries

Traditionally, the main role of the bank is to offer loans to its customers, to facilitate the intermediary role in the financial market between the investors and feed the need of the big corporations in terms of investment. This study is an attempt to analyze, at the same time, the impact of three factors that are involved in the income of the European banks. The first two are endogenous to the bank and the third one is deemed, a priori, to be exogenous to the bank. Our objective is to look at the influence of “Fee & commissions”, the “Net Non-interest income” and the interest rate on banks’ profitability in a panel data of 34 banks chosen from different European countries. The interest rate of reference is supposed to be under the control of the central bank but subject to movement due to the interactions between the cross-border countries and the competitive framework within the same country. The “Fee & commissions” and the “Net Non-interest income” are more related to the efficiency of the management team and the effectiveness of the processing inside the same bank. Our main finding is that the “Fee & commissions” are not really influencing the profitability of the European banks. However, the “Net Non-interest income” and the interest rate are significantly impacting the profitability of the European banks

Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators

The financial and banking crises around the world have prompted the regulators to revise, among others, the capital level of the banks to deal with the excessive risks taken by the banks, both conventional and Islamic. This study is the first attempt to investigate the relationship between risky assets and capital level in a mixed banking system applying the panel VECM and dynamic GMM estimators. The Malaysian mixed banking system is used as a case study taking panel data covering the period from December 2006 to October 2013. Our statistical results based on dynamic OLS (DOLS) tend to indicate that there is a positive relationship between the capital ratio (CAR) and risk weighted asset ratio (RWA) in the long run and also, the causality analysis based on panel VECM and two-step dynamic System GMM tends to indicate unidirectional causality in that the RWA is positively driven by CAR. Our results appear to suggest that higher capital buffer (excess capital above regulatory capital requirement) might have opened up more space for bank managers to taking risky positions while assisted by increasing domestic demand for credit facilities under favorable economic condition of Malaysia. In other words, high capital growth and capital buffer provides an extra cushion for Malaysian banks to pursue relatively riskier financing activities. For the full-fledge Islamic banks (IB) and Islamic bank subsidiaries (IBS), the existence of a cointegrating relationship between RWA and CAR suggests that the way the managers of Islamic banks behave towards risky assets follows the conventional practice

Welfare implications of interest-free bank asset management

This paper introduces some theoretical aspects of Islamic banking asset management strategies for reducing economic instability. Since public welfare deteriorates during periods of inflation and unemployment, the procyclical behavior of modern interest-based commercial banks is known to aggravate these fluctuations and ipso facto produce an even more severe impact on welfare. The paper will show that equity-based Islamic banks contain some structural features that reduce these procyclical tendencies and therefore shield public welfare from further deterioration

Economic principles in Islam: some methodological issues

This paper examines the nature of economic principles in Islam. Two types of economic principles are identified. The first type refers to the economic laws derived from revelation-based sources namely the Quran, Sunnah, Ijtihad and Ijma. The second type refers to economic lwas derived from reasoning and experience. The former is the economic system and the latter is economic theory. Both forms of economic laws are in harmony and have no basis for compartmentalization as there is no conflict between revelation and science in Islam. in theory building, it is shown that Quran based assumptions act as the linking mechanism in harmonizing revelation and science. As revelation is superior to reason and experience. Modification of economic models for empirical verification must not involve changes in Quranic based assumptions. Only the observed or tabi' based assumptions are subjec to modifications

Islamic finance: grasping with price and profit theory

The Halal industry comprising of bank and non-banking firms is hardly visible in theoretical rigor except for the Shariah rules it promotes to exert religious labelling. While Islamic banks pay greater attention the elimination of riba, gambling and ambiguities in financing contracts to claim Shariah legitimacy, non-banking companies are more concerned about halal slaughtering, avoidance of pork in the production process, prevention of food adulteration, promoting hygiene in food preparation and many more

How to expand the role of Islamic banking in trading

Ever since the establishment of Islamic banks in the 1970s, the difficulty in executing actual buy and sell transactions as the Quran commanded in the verse "Allah has permitted al-bay but prohibits riba" (Al-Baqarah 275) has spurred the industry into using questionable products that resemble interest-bearing loans as evident now in tawaruq munazzam and earlier in bay al-enah. Much of this unfortunate development in Islamic banking has to do with its deposit-taking function. Doing so requires the bank to follow stringent Basel Accord capital requirement against any risky positions it took in the business such as equity, leasing and trading positions. The trading business, namely buy and sell is the focus of this discourse. In addition to high capital charges, it is also besieged by inventory costs that can escalate bank overheads. These two problems can justify the lack of interest in the buy and sell model also known as murabaha by purchase order (MPO) or true sale murabaha financing (TSMF) as it requires the bank to hold risk of ownership of the purchased asset before making the credit sale to the customer