Mixed capital of Islamic financial institutions, is it Islamic?

Among the most debated issue concerns the initial capital of Islamic banks and takaful companies, especially when initiated by a conventional parent company. Some people doubt the purity of the capital in Islamic banks and takaful and eventually deny the benefits of Islamic banking. Hence, the question here is could Islamic banks and takaful be truly Islamic when its capital is not completely halal

Just money and interest: moving beyond Islamic banking by reframing discourses

Enlightenment discourse advanced an idiosyncratic cognitive framework and epistemology that rationalized the overturning of usury laws. Under capitalism, money innately changed as banks gained the institutional right to create credit and lend it into existence at interest. The implicit ideologies of this discourse instantiated a reframing of traditional conceptions about money and interest worldwide. In contradistinction, Islam prohibits riba, a term approximated as usury/interest, presenting ethical problems to banking practice. This conflict has yielded Islamic banking and finance (IBF), bolstered by a small cadre of Shariah scholars, even though it continues to fail in its stated social justice imperatives. IBF evidently charges what is commensurate to interest while declaring it does not, promoting its products as ‘Shariah compliant’ – a term producing different meanings to different interpreters. This study adopts an Islamic maqasid methodology and analyzes discourses in reframing how such an industry emerged, how its practice departed from its claims, how it sustains itself, and asks why Muslims have not moved beyond it towards alternatives that procure greater possibilities for social and environmental justice. It reexamines discourses connected to the historical and contextual reframing of money, usury, interest and riba, and isolates the associated semantic obfuscations that power has influenced

Financial innovation and engineering in Islamic financial institutions

Drawing from work found in the financial innovation literature, the main objective of this research is to explore the effect of religious orientation towards financial innovation and engineering in Islamic Financial Institutions (IFIs). The research also examines what constitutes this religious orientation and how it is enacted in the innovation process. Religious orientation towards financial innovation is conceptualised and defined, as a system, in this research study. In order to achieve this objective, the study employs multiple theoretical perspectives to develop its theoretical framework. It combines innovation orientation theory with the theory on boundary objects to explore the role of religion in the financial innovation processes in IFIs. Religious orientatio

DEVELOPING ISLAMIC FINANCE OPPORTUNITIES FOR TRADE FINANCING: ESSAYS ON ISLAMIC TRADE VIS-À-VIS THE OIC TEN-YEAR PROGRAMME OF ACTION

International trade has been defined as the engine of growth by international development institutions as more cross-border trade associated with more economic activity, higher employment, hence, poverty alleviation. If trade is the engine of growth, trade finance can be defined as grease for the engine. Hence, availing more funds to finance the enormous amount of international trade, counting about half of global GDP, is an important agenda for the OIC as well as many multilateral development institutions. The main reason behind the efforts to avail more funds for trade finance is to direct valuable financial resources from speculation to explore opportunities to increase international trade in a way to grease and roll the wheel of real economy. With reference to the OIC Ten-Year Programme of Action to Meet the Challenges Facing the Muslim countries in the 21st century, this research aims to introduce outward-looking, cost-effective, and informal policy options for a resilient OIC trade integration to increase international trade among OIC countries. In this regard, the first essay aims to explore the determinants of recent increase in intra-OIC trade to ascertain if it is due to policy instruments implemented by OIC organs or some other externalities. It is argued that recent increase in intra-OIC trade percentage is likely to be the product of reverse effects of oil price surge and Euro appreciation but not trade diversion effect of OIC membership. OIC membership itself alone would not increase intra-OIC trade if not accompanied with policy instrument for trade facilitation to make cross-border trade easier among member countries. However, as customs revenue constitutes the bulk of public revenue for many OIC countries, they need to be convinced about benefit of trade facilitation. Accordingly, with reference to the unwillingness of OIC countries for trade facilitation, the same essay scrutinizes the effect of tariff and WTO Customs Valuation Agreement on customs’ revenue of OIC countries. The results suggest that increasing tariffs might increase customs revenue for big countries but not for small countries. Besides, the implementation of WTO Customs Valuation Agreement does not decrease customs revenue as its indirect undervaluation effect would be surpassed by its direct effect of less incentive for tax evasion. As a crucial crop for public finances in many OIC countries and initial stage of industrialization, special emphasis is given to development of the cotton sector under the OIC Ten-Year Programme of Action. The Third Expert Group Meeting on Enhancing Production Efficiency and International Competitiveness in OIC Cotton-Producing Countries adopted the Five-Year OIC Cotton Plan of Action (2007-2011). As per the mandate of OIC, two Islamic trade finance products are proposed, one for the cotton sector through the resources mobilized with mudarabah, by proposing salam for complete supply chain financing in the second essay, and another for resource mobilization based on 2-Step murabahah in the context of international trade as an alternative to commodity murabahah, sukuk as well as mudarabah in the third essay. In conclusion, based on further findings of the survey, the questionnaire and interviews; capacity building in trade facilitation for small countries to be complemented with OIC mutual recognition agreement for standard and conformity assessment within halal food standard development; integrated single window among OIC countries’ customs; OIC cumulation system of rules of origin for market access; inward processing relief as an alternative to free trade zones; development of the cotton sector among OIC countries to address production constraints of LDMCs and 2-Step murabahah to mobilize trade finance resources to boost trade of OIC countries, particularly for LDMCs, are proposed as a part of concretely defined and well-grounded OIC trade integration framework

Translating Islamic Law: the postcolonial quest for minority representation

This research sets out to investigate how culture-specific or signature concepts are rendered in English-language discourse on Islamic, or ‘shariʿa’ law, which has Arabic roots. A large body of literature has investigated Islamic law from a technical perspective. However, from the perspective of linguistics and translation studies, little attention has been paid to the lexicon that makes up this specialised discourse. Much of the commentary has so far been prescriptive, with limited empirical evidence. This thesis aims to bridge this gap by exploring how ‘culturalese’ (i.e., ostensive cultural discourse) travels through language, as evidenced in the self-built Islamic Law Corpus (ILC), a 9-million-word monolingual English corpus, covering diverse genres on Islamic finance and family law. Using a mixed methods design, the study first quantifies the different linguistic strategies used to render shariʿa-based concepts in English, in order to explore ‘translation’ norms based on linguistic frequency in the corpus. This quantitative analysis employs two models: profile-based correspondence analysis, which considers the probability of lexical variation in expressing a conceptual category, and logistic regression (using MATLAB programming software), which measures the influence of the explanatory variables ‘genre’, ‘legal function’ and ‘subject field’ on the choice between an Arabic loanword and an endogenous English lexeme, i.e., a close English equivalent. The findings are then interpreted qualitatively in the light of postcolonial translation agendas, which aim to preserve intangible cultural heritage and promote the representation of minoritised groups. The research finds that the English-language discourse on Islamic law is characterised by linguistic borrowing and glossing, implying an ideologically driven variety of English that can be usefully labelled as a kind of ‘Islamgish’ (blending ‘Islamic’ and ‘English’) aimed at retaining symbols of linguistic hybridity. The regression analysis confirms the influence of the above-mentioned contextual factors on the use of an Arabic loanword versus English alternatives

Fatwa shopping as modernising Islamic finance law

The thesis examines the evolving role of Islamic financial instruments in the modernisation of Islamic financial practices. Crucial to this process of modernisation is the proper appreciation of the impact and importance of selective Sharia opinions termed fatwa shopping in this thesis. Fatwa shopping involves selecting, reviewing, and combining Islamic juristic rulings in the form of fatwas (the plural of fatwa in English and it is also referred to as fatawa in Arabic). Using this approach, medieval Islamic rules and contracts are utilised on a functional basis and as a means of developing modern functional equivalents. The thesis argues that fatwa shopping continues the classical tradition of doctrinal selections (talfiq) made by Muslim jurists to find an interpretation that best fits the circumstances. The application of this approach finds expression in the views of Muslim scholars and Islamic Financial Institutions (IFIs) and their Sharia Supervisory Boards (SSBs) reviewing and selecting various Islamic juristic rulings from different schools of Islamic jurisprudence to certify modern Islamic financial products and services. This approach recognises that medieval Islamic commercial contracts have significant problems in terms of feasibility and practicality in modern banking transactions. The thesis takes a middle path between legitimacy and practicality by allowing the development of Islamic financial instruments that obey Islamic juristic rulings but also take into account economic and financial considerations. Since financial institutions including IFIs are crucial to economic development and invariably involve risks to the economy, institutions, and consumers, regulation plays an important role in ensuring financial stability and risk management. Thus, it is important to contextualise the position of Islamic finance within the global financial system. Islamic financial institutions cannot be separated from the general regulatory framework and the management of risk. A key justification for the regulation of banking and financial institutions is to mitigate and prevent risks that may jeopardise the industry and the whole economy. This is reflected in both the public interest and economic theories of regulation. The government has a central role in risk regulation to protect the public from adverse consequences of banking and financial transactions through regulations that are primarily concerned with specifics risk in the financial industry. In the case of IFIs, it is not only government that has a central role in the development of financial products and the regulation of risks in Islamic finance. SSBs, as non-governmental bodies, provides substantive determinations as to whether a particular financial activity or instrument is Sharia compliant. Unlike conventional products, the character of Islamic financial products relies on Sharia compliance. One of the main challenges for Sharia compliance is whether fatwas can accommodate modern risk management instruments. Risk management instruments are pivotal to managing and hedging risks. These include various forms of derivatives as well as insurance and limited liability corporations. As modern derivatives and insurance are considered essential to deliver benefits to the financial industry and the economy as a whole, modern Islamic finance should be able to adapt to this economic and risk management environment. Despite disagreements Muslims scholars on whether modern instruments comply with Islamic law, the method of selective Sharia rules or fatwa shopping provides a mechanism for deriving modern fatwas on which to base Sharia compliant equivalents on derivatives, insurance, and limited liability corporations. In order to assess how IFIs actually operate in a financial system, the thesis examines Islamic finance in two jurisdictions: Indonesia and Australia. These two jurisdictions are selected as providing a comparison of a system that makes little or no accommodation for a very small Islamic finance industry (Australia) and Indonesia where fatwas are recognised in the local banking system; the validity of Islamic financial instruments depends not only on satisfying conventional regulatory requirements but also on SSBs certification of Sharia compliance. The legitimacy of local Islamic financial products and services operates through a non-state agency, Sharia Advisory Boards – Indonesian Ulama Council. They set their own juristic rules. The fatwas produced by that body play an important role in harmonizing Sharia opinions in the Indonesian financial system. Local banking acts direct Indonesian regulators to adopt fatwas as a national benchmark. In addition, fatwas of that governing body allow the adoption of various juristic rules from different Islamic schools in defining local fatwas on Islamic finance. In contrast, in Australia there is decentralised Sharia regulation so that local IFIs develop their own Sharia justifications for products and services offered to the markets. Local regulators have no concerns on Sharia compliance aspects of those local IFIs. The thesis concludes that that selective Sharia rules or fatwa shopping has contributed to the modern development of Islamic finance. The method has been successful in harmonizing legitimacy and practicality of Islamic financial transactions with the needs of a modern financial system

Three essays on institutions and banking

The performance of banks and their level of growth have a significant impact on the entire economy. However, only a few countries have a developed banking system and economic development. Political economy emphasises the importance of the institutional environment of each market on economic and banking performance. In particular, the theory of political institutions and the hierarchy of institutions hypothesis (HIH) refer to the role of political institutions as ultimate institutions that determine and affect other institutions, such as economic and regulatory, and their critical impact on economic and banking performance. To investigate the relationship between institutions and banking, this study first identifies the theoretical differences between conventional and Islamic institutions; theoretical relationships between institutions and banking sectors; and the existing research performance on this topic using a systematic literature review method. Second, it empirically examines the impact of institutional environments, including political, economic, regulatory, and Islamic institutions, on bank efficiency. By conducting a panel regression analysis with a sample of 594 banks in 18 countries from 2005 to 2020, this study ascertains the connection between institutions and bank efficiency. Finally, it explores the association of institutional environments and bank liquidity creation. To achieve this aim, this study employs a crosscountry analysis of 584 banks from 18 countries from 2000 to 2020. This study offers several interesting results. First, although Islamic institutions share common aspects with conventional institutions, such as the acknowledgement of democratic values in society, they have distinct and additional institutional features. For instance, aspects such as definition, features, elements, and requirements differ in Islamic views from the conventional ones because of their sources and purposes. Consequently, the Islamic perspective on democracy is derived from the ultimate religious sources of Islam. Second, while there have been clear theoretical relationships between political, economic, and regulatory institutions and banking performance, empirical research on this issue has not been conducted well in the conventional and Islamic banking literature. Third, by means of a quantitative methodology, this study finds that political institutions positively affect both bank efficiency and liquidity creation. Fourthly, the impact of economic and regulatory institutions varies according to the presence of high-quality political institutions. This result empirically reinforces the theory of the hierarchy of institutions hypothesis (HIH) by confirming the vital and ultimate role of political institutions and their binding effect on bank performance. Finally, this study findsthat Islamic institutions positively influence Islamic bank efficiency and liquidity creation. This result empirically supports the theory of political economy and new institutional economics, which stresses the role of proper institutional environments

On financial liberalisation in LDCs : the case of Egypt, 1960-93

This thesis deals with the issue of financial development in Egypt at the sectoral, macroeconomic and household levels over the period 1960-93. The thesis is organised in ten chapters, including a summary of the main results in chapter (10). Chapter (1) provides an introduction of the topics treated in the thesis and an overview of the main developments in the Egyptian economy during the study period. Chapter (2) reviews the theoretical literature and empirical studies on the main issues concerning financial development. Chapters (3) and (4) derive stylised facts from the discussion of the evolution of the financial system in Egypt. Chapter (3) assesses the structure, regulation and performance of the banking sector. Chapter (4) focuses on the Egyptian securities market, exploring its development since its establishment in 1883. Further it analyses the performance of the market using the main published indicators and highlights the impediments to its progress. Chapter (5) is concerned with the growing role of Islamic finance in both the formal and informal sectors in Egypt. After constructing a model to illustrate the distinctive characteristics of Islamic banking, the chapter investigates the role of Islamic banks and Islamic branches of conventional banks. The chapter also provides an analysis of the Informal Islamic Investment Companies which flourished in Egypt during the 1980s. Chapter (6) analyses the causes, measures and impact of financial repression in Egypt over the period 1960-90. The findings of this chapter indicate that financing the budget deficit was the main reason for repressing the financial sector. The chapter discusses the impact of the different repressive methods used including inflation tax, interest rate ceilings, high reserve requirements, directed credit schemes, regulation on the portfolio composition of banks, and government ownership of financial intermediaries. The government revenues from particular repressive measures such as inflation tax, seigniorage and interest rate ceilings were estimated for the whole study period and were substantial by most international standards. There follows a discussion of the main consequences of financial repression including capital flight, money substitution, the excessive use of inflation hedges and the thriving of informal financial transactions. Chapter (7) presents an econometric analysis of the impact of the real interest rate on saving, investment and economic growth in Egypt. The results of this analysis indicate that the real interest rate had a positive impact on financial saving, possibly through a portfolio shift. However its impact on total saving, investment and economic growth was insignificant. Chapters (8) and (9) are concerned with the issue of the coexistence of formal and informal financial sectors in rural Egypt. The analysis is based on a survey, of 200 households undertaken by the author in four Egyptian villages in the Nile delta. The methodology adopted and the description of the surveyed region are reported in chapter (8). The findings provided in chapter (9) suggest that informal financial transactions in our sample can be classified as intermittent. There was no evidence of the existence of professional money lenders. Loans, with very few exceptions, were interest free. Most loans were undertaken without contract or collateral. However default cases were low thanks to societal governance. Moreover the chapter analyses the characteristics of RoSCA in Egypt and its role in financial intermediation. The determinants of formal and informal borrowing are estimated using Tobit analysis. The chapter concludes with a discussion of the implications of financial liberalisation on household credit decisions. This thesis highlights the importance of a liberalised financial system for economic development in Egypt. However it argues that financial liberalisation, on its own, is not a sufficient remedy for the problems encountered in the financial sector. Macroeconomic stability and prudential regulation are considered to be essential prerequisites for liberalisation. In addition the thesis strongly emphasises the need for the restructuring of the financial system and the ensuring of its compatibility with the cultural environment to enable the full realisation of the benefits of financial liberalisation

Exploring Legal, Regulatory and Shari‘ah Compliance Issues in Islamic Financial Instruments: Derivatives and Sukuk

In general derivatives, futures, options and swaps are considered against the principles of shari‘ah for various reasons, such as the absence of asset-backed deals, dealing in prohibited transaction of debt, presence of element of gharar (uncertainty), gambling, absence or non-existence of subject matter, Short-Selling, sale of subject-matter without prior acquiring of possession or constructive possession, ghabn (market price manipulation), ‘ina (sale and buy-back), tawarruq (multiple buy-back sales involving no actual asset transfer), amongst others. In the recent past there have been attempts to find and explore Islamic hedging products having same functions as that of derivatives having link with real economy growth. Financial transactions either linked with economic activities or they are pure financial instruments known as ‘synthetic’ transactions having no contribution to the real economy. Due to Muslim investors’ demand and excess saving due to oil wealth in the Gulf Cooperation Council, there is a demand for Islamic financial transactions. Therefore, derivatives in compliance with shari‘ah principles were developed. Sukuk are fine and popular example of such financial products and emerged as a strong substitute to conventional derivative products. Sukuk are considered shari‘ah compliant but at the same time ethical and hence fits into the requirements of financial products to overcome the adverse effects of the financial crisis. This research, hence, explores and analyses sukuk as an Islamic securitization product. In addition, this research also investigates whether or not sukuk meet the standards and criteria of conventional securitization structures in order to safeguard the interests of different parties involved in it and the public at large. Furthermore, this research examines sukuk structures whereby it identifies further shari‘ah and ethical underlying principles for further product development, design under shari‘ah. In responding to the research aims, this research attempted to peruse through original sources of both shari‘ah and English Common law on sukuk and the application of wa‘ad (undertaking) particularly in the context of sukuk and derivatives. While discussing the identified research aims in terms of determining the key legal, regulatory and shari‘ah compliance issues in the development of sukuk, the focus remained on the United Kingdom (UK), which attempts to become one of the leading centers of Islamic finance. After foundational and exploratory research, this study concludes and answered the research questions that: (i) sukuk are based on shari‘ah principles; (ii), derivatives are allowed under shari‘ah; (iii) sukuk as Islamic derivative instruments are as efficient as that of conventional derivative products and apply the similar securitization principles; (iv) wa‘ad has the same authority as that of ‘aqd (contract) and can be compared with ‘promise’ and ‘promissory estoppel’ in Common law; (v) use of wa‘ad in equity-based sukuk is against the shari‘ah; (vi) usage of wa‘ad in derivatives like Foreign Currency Forward Options, Total Return Swaps and Short-Selling is inappropriate, and (vii) UK is an attractive country for promotion and growth of sukuk. For this purpose the results of the sub-research questions were: (a) UK has sufficient legislative and regulative infrastructure to entertain shari‘ah compliant products such as sukuk in the future (b) UK so far is impartial in the debate on shari‘ah compliance approval process of products (c) there is confusion about whether sukuk are categorised as debt instruments or Collective Investment Schemes. This study came with an extensive research and analysed growth of sukuk and its structures in UK with legislative and regulatory developments and concludes UK is a place where development of sukuk is phenomenal for the strategic significance of London Stock Exchange in the global market. Though not many sukuk are being issued in UK but it is a place where most of the sukuk are listed

A comparable cross-system bank productivity measure: Empirical evidence from the Malaysian dual banking system

This thesis seeks to fill a void in the banking performance literature by (1) proposing a cross-system bank productivity assessment methodology that can be applied to both conventional and Islamic banking and (2) implementing this methodology on a dual banking system to gauge the comparable productivity of Islamic and conventional banks relative to one another in a banking system that has experienced deregulation and consolidation. The growing significance of Islamic banking cannot be overlooked as its growth in recent years has significantly outpaced conventional banking. This new banking duality trend profoundly impacts the relative competitiveness of both banking systems and this in turn, may significantly affect the allocation of scarce financial resources between conventional and Islamic banking