Gharar and mispricing of equity warrants, Malaysian evidence

In Islamic finance, the use of derivatives seems to be in dispute among the scholars despites its prominent emergence in the market. Majority of scholars object the use of derivatives on the basis that it contains the element of gharar. The Jeddah Fiqh of Academy rules that options are objectionable for they could not infer options in the world today with any of the Shariah nominated options contracts. Nevertheless, some scholars argue the validity of this instrument based on the concept of khiyar-al-shart and drew parallel with the concept of bai-al urbun. This study investigates warrants pricing of 73 Malaysian warrants traded within the six year period by employing the BSOPM. There seems to be deviations of pricing where 96% (70 out of 73) of the warrants traded are mispriced in reference with their theoretical values. This mispricing of warrants indicated inefficiency in the Malaysian warrants market. Therefore, based on the argument above and the extent of mispricing revealed in the analysis, this study found the element of gharar in warrants contract when viewed from the pricing inefficiency in the market. Mispricing of warrants in Malaysian market indicates speculative activities and speculation is not allowed in Islam. Speculation may contain gharar (uncertainty) and maysir (gambling) which are all prohibited in Islam. Islam forbids these because they may result in wealth accumulation at the expense of other parties. This activity violates the concept of adl (justice), does not serve the concept of maslahah (public interest) and does not follow the maqasid al Shariah

CORPORATE FINANCING BEHAVIOUR OF SHARIAH COMPLIANT E50 SMEs. A PANEL DATA APPROACH OF GMM.

Motivated by the recent outstanding growth of Islamic Finance in Malaysia, this study aims to investigate the debt financing behaviour of Shariah compliant E50 SMEs in Malaysia covering the existence of target debt, speed of adjustment and factors affecting the adjustment speed to target debt from 2009 to 2013. The Shariah Advisory Council (SAC), has set up certain standard of parameters as guidelines and carried out periodical monitoring in classifying Shariah compliant securities like the prohibition of activities that involve interest (riba), gambling (maisir), uncertainties and speculative trading (gharar). The dynamic model employed and estimated using the Generalized Method of Moment (GMM). Under the dynamic model, the observed debt of a firm should be equal to its optimal debt. However, with the presence of adjustment cost, a firm performs only a partial adjustment to be at the target debt. The model revealed certain determinants significantly influence target debt financing. The positive relationship between tangibility and capital structure yielded in this study enhances Shariah imposition that debt must be asset-backed which means a firm operating under Islamic principles cannot have debt exceeding the tangible assets. This study contributes to the literature and fills the gap by exploring into a relatively new area of debt financing which is the dynamic aspects and also help to enhance the understanding on debt financing behaviour of Shariah compliant SMEs in Malaysia

Do Muslim directors influence firm performance? empirical evidence from Malaysia

This study examines the impact of several corporate governance mechanisms on the performance of firms in Malaysia. Giving particular attention on board diversity, this study looks into the impact of Muslim directors in the board of directors (BoD) on firm performance. It is found that the presence of Muslim directors in the BoD does have a significant impact on the performance of the firms and can bring the firm to its utmost performance. Board independence seems to coexist with CEO duality in pursuing maximum firm value and directors’ remuneration does not seem to be the driver and motivator to achieve good firm performance. Board size is also taken into consideration when devising corporate governance structure where the larger the size of the board the better performance it is for the firms. Policy makers and other responsible players should take into account the mechanisms discussed in this study when structuring corporate governance. This study fills the gap and contributes significantly to the literature by proving extensive findings with regards to the impact of corporate governance on firms’ performance especially the presence of Muslim directors in BoD in Malaysia

Derivatives, pricing efficiency and gharar: evidence on embedded options in Malaysia

Derivatives, despites their extensive usage as risk management tools, receive differing arguments among the Muslim scholars. Focusing on embedded option contracts, the resolution of Islamic Fiqh Academy, Jeddah No (63/1/7) under the financial markets considers the currently applied option contracts as different from the Shariah nominated contracts and being neither a sum of money nor a utility or a financial right which may be waived, makes it forbidden in Shariah. Most Islamic scholars accuse option contracts of containing gharar and are transacted for speculative gains thus, prohibited in fiqh muamalat. Therefore, this study intends to investigate the accusation of the gharar elements in the option contracts. The Black Scholes Option Pricing Model (BSOPM) is used to examine the pricing of 183 outstanding embedded options (equity warrants) from January 2006 to December 2012. Cases of mispricing were detected in reference with their theoretical values indicating inefficiency in the Malaysian market and speculative activities taken place which are prohibited in Islam. Speculation contains gharar (uncertainty) and leads to maysir (gambling) and may result in wealth accumulation at the expense of other parties’ jahl (ignorance). Violating the concept of adl (justice), not serving the concept of maslahah (public interest) and not complying with the Maqasid al Shariah make speculation forbidden. The existence of gharar is empirically and statistically evidenced in the speculation activities indicated by the excessive mispricing detected in this study. This study contributes significantly in the literature by providing empirical evidence which is very much lacking in the study of options in Islamic Finance

Ownership and Debt Financing: Indonesia Evidence

This study examines whether ownership concentration influences debt financing of firms in Indonesia. Known to be dominated by family owned, firms in Indonesia seem to have certain distinctive characteristics that are evidenced to have significant impact on their debt financing. Apart from the common firm-level determinants, ownership concentration does play an important role in determining the level of debt consumption of the firms. It is revealed that ownership concentration impacts the debt financing positively, reflecting the power and authority of the large controlling shareholders in using debt as controlling mechanism on the entrenched managers. The positive relationship may also be explained by the reluctance of large shareholders to engage with equity financing as to avoid ownership dilution and thus can maintain the control of the firms. In terms of ownership identity, however, family firms in Indonesia seem to consume much lesser debt level due to the alignment of interest between shareholders and managers, which makes issuing debts as manager’s disciplinary tool less crucial for family-owned firms. This study contributes to the literature by offering insights on how ownership concentration and family-owned firms decide on their capital structure and how certain distinctive characteristics of the firms influence the financing decision

The pricing efficiency of equity warrants: a Malaysian case

The objective of this paper is to determine the pricing efficiency and behavior of equity warrants traded in the Bursa Malaysia. Specifically, this paper will focus on the studies of 85 randomly selected samples of listed warrants (46 main board warrants, while the remaining 39 were second board warrants) for the trading period of 100 days from January 1, 2004 until May 31, 2004. The model for pricing of warrants in this study is primarily based on the Black-Scholes Option Pricing Model (BSOPM). The theoretical price derived using the BSOPM will then be adjusted to incorporate the dilution effect. The adjusted theoretical pricing will afterward be compared with the actual market prices of warrants to determine the pricing efficiency. The paper will also look into related issues such as the extent of mispricing, factors that could lead to the inefficiencies, volatility of the warrants and the underlying stocks, the behavior of price relationships and appropriate strategies to be adopted with regards to the findings. The study concludes that there is significant mispricing on most of the traded warrants, which can be categorizes as underpriced, overpriced and extremely overpriced. A few warrants, nevertheless, were found to be insignificantly mispriced

Zakat contribution model in entrepreneurship empowerment of zakat institutions: Case study of Lazismu Pusat

This study aims to find out how the strategy of distribution implemented by Muhammadiyah Zakat Management Institution (Lazismu) in the entrepreneurship empowerment program and zakat distribution program for zakat recipients. The method in this study uses a descriptive qualitative approach with data collection techniques in the form of observation, interviews, and documentation, with validity using a triangulation model. Sampling was focused on the distribution of the entrepreneurship empowerment program for the 2021 period. The sample studied was the zakat manager and 8 zakat recipients of the empowerment program. This study shows that financial assistance in the form of zakat funds can increase the income and economy of most recipients. Accordingly, this program helped the community to improve the business and realize the main goal of productive zakat, namely increasing the economy of zakat recipients and adding new zakat givers and new zakat recipients. Furthermore, the main objective is to develop and advance the economy of the poor zakat recipients. The solution offered regarding the problems faced by Zakat recipients is to maximize the role of the Leaders in monitoring and empowering zakat recipients on an ongoing basis. In addition, monitoring and supervision are carried out by holding regular recitations for zakat recipient

Book Excerpt: Islamic fund and wealth management: a way forward

This book specifically provides updated information on fund and wealth management with regards to current policies and best practices. Empirical findings, case studies discussions, seminal as well as recent related literature are gathered in this book to cater to everyone inside or outside the fund and wealth management industry

The impact of sukuk on corporate financing: Malaysia evidence

A remarkable effect of bond market development on corporate financing is detected among firms in Malaysia en route the study to identify the existence of target capital structure and simultaneously explore firm specific and country specific determinants of target capital structure for firms in Malaysia. This is argued to be the effect of the phenomenal development of sukuk, or Shariah-compliant bonds in Malaysia. The distinctive effect of bond market development with sukuk element on Malaysian firms shows the substantial influence of country specific factors like bond market development as well as governance incorporate financing decision. Employing the dynamic Partial Adjustment Model estimated based on the Generalized Method of Moments (GMM) estimator using data of nonfinancial listed firms for the period of 2000-2009, this study contributes to the existing literature by highlighting the impact ofa well-developed sukuk in bond market development on corporate financing decision and how good governance can ensure liquid and vibrant bond market as an alternative financial intermediary. This study concludes that several factors significantly influence target capital structure and the element of sukuk in bond market in Malaysia coupled with good governance have a substantial impact on corporate financing decision among firms in Malaysi

Residential property price hike and speculation

This study analyzes the behaviour of property price in Malaysia by examining factors influencing the residential property prices. It aims to determine whether property prices hike in Malaysia can be explained by the fundamental factors or it is due to other unexplained factors, such as speculation. Findings from the study reveal that most of the factors did have significant influence on property price. In addition, the cointegration analysis indicates that the property price and its factors are cointegrated for all property market segments across states. This implies the presence of a long run relationship between the property price and its determining factors, despite slow adjustment of property price towards equilibrium in the long run. This study concludes that the residential property price hike in Malaysia is impacted by fundamental factors and is not speculative in nature