Nonperforming loans in the GCC banking sectors: Does the Islamic finance matter?

This paper investigates the bank-level and country-level factors determining nonperforming loans (NPL) in the commercial banking industry of Gulf Cooperation Council (GCC) countries. Specifically; it examines the impact of the sectoral distribution financing growth and Islamic finance methods growth on NPL. To do so, we apply generalized method of moments (GMM) techniques, over the 2005–2011 period. Our findings indicate that the sectoral distribution of Islamic financing has an adverse impact on NPL, which suggest that the sectoral financing growth of Islamic banks increases the credit risk exposure more than conventional banks. The findings of the Islamic finance methods growth show that the impact of fixed-income debt contracts could increase NPL more than profit-and-loss-sharing contracts

The Impact of Intellectual Capital Formation and Knowledge Economy on Banking Performance: A Case Study of GCC's Conventional and Islamic Banks

Purpose: This paper aims to evaluate the impact of intellectual capital in terms of human capital, structural capital, and capital employed on the financial performance of Islamic and conventional banks in the GCC countries. Design/methodology/approach: Along with the measurement discussion, the empirical analysis examines the relationship between intellectual capital measured through VAIC and the financial performance of banks in the GCC states by conducting a panel of six GCC countries, including 24 Islamic banks and 32 conventional banks covering 2012-2020 period. Findings: This paper shows that while Islamic banks have similar VAIC, HCE, and CEE results to conventional banks, Islamic banks have lagged behind conventional banks regarding the impact of structural capital on financial performance. It is argued that this is in contradiction with Islamic ontology and epistemology, which essentialises intellectual capital formation. Originality: This study conducts a comparative examination of the intellectual capital performance and its impact on financial performance by using interaction variables to capture any differences between Islamic banks and conventional banks in the GCC countries. The paper also considers the knowledge economy impact as a novelty, which is prominent for the GCC countries. In addition, Islamic ontology’s essentialisation of knowledge and its articulation in the form of intellectual capital within modern understanding is widely discussed, as part of originality. Lastly, the findings are located within Islamic ontology and epistemology. Practical Implications: Islamic banks should promote research and development for their intellectual capital at the product, operational and institutional levels, since Islamic banking is considered an alternative financing method, incorporating a new form of knowledge-based institutions inspired by capitalist institutions

Developing Maqasid al-Shari’ah Index to Evaluate Social Performance of Islamic Banks: A Conceptual and Empirical Attempt

The rise of Islamic banking and finance is now a reality with Shari 'ah compliant financial operations existing in many different parts of the world. However, its development has recently been subjected to criticism in relation to the aspirational objectives of Islamic moral economy, which constitutes the moral foundations of Islamic finance. The aspirational objectives are general expressed with maqasid al-Shari'ah, which is defined as 'human well-being'. The aim of this research, hence, is to evaluate the social performance of Islamic banks according to maqasid al-Shari'ah upon the realization of Islamic Moral Economy aspirations. AbdelMajid Najjar's concept of maqasid al-Shari 'ah with eight orientations or articulations is adopted to construct an evaluation framework aligned with the objective of rendering a critical improvement of current empirical studies. In operationalizing the developed framework, this study conducts empirical investigations by taking 13 banks from 6 countries for 5-year period (2008-2012) as a sample. In doing so, the annual reports of the sampled banks for the period are subjected to content analysis to generate the necessary data in applying to the formulated framework. Empirical evidence indicates that there is lack of achievement in maqasid al- Shari 'ah performance of Islamic bank and finance. Nevertheless, the overall industry concentrates mainly on self, faith and rights and stakeholding rather than wealth orientation, despite the fewer contributions in social entity, intellect, posterity and ecology. Additionally, the empirical results find that there are different orientations across the banks and countries. Finally, the industry orientation is estimated in this research, which is located to be somewhere betweenfaith and rights and stakeholding

Comparison of Portfolio Selection and Performance: Shari’ah-Compliant and Socially Responsible Investment Portfolios

This study examines the effect of Islamic screening criteria on Shari’ah-compliant portfolio selection and performance compared to Socially Responsible Investment (SRI) portfolio. Each portfolio constructed from 15 stocks based on FTSE 100 using data from year 1997. Mean-variance portfolio optimization is employed with some financial ratios added as constraints for the Shari’ah portfolio. Annual expected return of each portfolio from 2008 to 2013 is used to calculate Sharpe’s ratio, Treynor ratio and Jensen’s alpha as the performance measurement tools. Macroeconomic variables are assessed using ordinary least square to examine whether they influence the portfolios’ expected returns or not. The result finds that Shari’ah portfolio has a better performance than SRI from year 2008 to 2010 shown by higher value of the measurement tools. However, from 2011 to 2013, SRI portfolio has better performance than Shari’ah portfolio

Comparing the Determinants of Fund Flows in Domestically Managed Malaysian Islamic and Conventional Equity Funds

Purpose: This paper aims to provide an empirical evidence on the fund flows-past return performance relationship by also considering the management expense ratio, the portfolio turnover, the fund size and the fund age of Islamic equity funds (IEF) investors in comparison with conventional equity funds (CEF) investors. Design/methodology/approach: By using panel data, the sample of Malaysian domestic managed equity funds are considered comprised of 20 individual funds from IEF and CEF respectively from 2011 to 2013. Findings: The results provide evidence that IEF investors have different factors when choosing funds in comparison with CEF investors. The study finds that the key factor influencing the fund flows of IEF is the management expense ratio, compared to the CEF which is fund size. This study also shows that all the fund characteristics of IEF and CEF are positively or negatively related to the fund flows. Research limitations/implications: The present study may be extended by considering other fund categories such as the money market fund, the balanced fund, the bond fund and the fixed income fund. Practical implication: The empirical findings of this paper clearly call for fund managers and investors to review their investment policy. The results could also provide better information and guidance for investors as well policy-makers on the factors that affect the fund flow for Malaysian Islamic and conventional equity funds. Originality/value: This paper is among the earliest empirical evidence studies on the fund flows-past return performance relationship by focusing in a comparative manner on IEF investors and CEF investors in Malaysia

Examining the Performance of Islamic and Conventional Stock Indices: A Comparative Analysis

Islamic indices encompass different fundamental principles to those held by conventional ones, which directs attention onto comparative financial performance. This paper offers a comprehensive performance comparison between Islamic indices and conventional indices, based on four main markets: worldwide, the US, Europe, and Asia-Pacific for the period of 2007 and 2017 through financial ratio comparison and also the CAPM-EGARCH model. The main finding shows that Islamic indices yield higher average returns and lower risks during the 2007-2009 and 2013-2017 periods for all four markets, compared with respective conventional markets. During 2009-2013 period, the comparison proves inconclusive, since Islamic indices demonstrate better performance in European and Asia-Pacific markets, while conventional indices operate at an enhanced level within other markets. Overall, Islamic indices outperformed conventional indices during the global financial crisis period (2007-2009) and the latter post-crisis phase (2013-2017), especially in the European and Asia-Pacific markets

Higher Ethical Objective (Maqasid al-Shari'ah) Augmented Framework for Islamic Banks: Assessing the Ethical Performance and Exploring its Determinants

This study utilises higher objectives postulated in Islamic moral economy or the maqasid al-Shari’ah theoretical framework’s novel approach in evaluating the ethical, social, environmental and financial performance of Islamic banks. Maqasid al-Shari’ah is interpreted as achieving social good as a consequence in addition to well-being and, hence, it goes beyond traditional (voluntary) social responsibility. This study also explores the major determinants that affect maqasid performance as expressed through disclosure analysis. By expanding the traditional maqasid al-Shari’ah,, we develop a comprehensive evaluation framework in the form of a maqasid index, which is subjected to a rigorous disclosure analysis. Furthermore, in identifying the main determinants of the maqasid disclosure performance, panel data analysis is used by including several key variables alongside political and socio-economic environment, ownership structures, and corporate and Shari’ah governance-related factors. The sample includes 33 full-fledged Islamic banks from 12 countries for the period of 2008–2016. The findings show that although during the nine-year period the disclosure of maqasid performance of the sampled Islamic banks has improved, this is still short of ‘best practices’. Through panel data analysis, this study finds that the Muslim population indicator, CEO duality, Shari’ah governance, and leverage variables positively impact the disclosure of maqasid performance. However, the effect of GDP, financial development and human development index of the country, its political and civil rights, institutional ownership, and a higher share of independent directors have an overall negative impact on the maqasid performance. The findings reported in this study identify complex and multi-faceted relations between external market realities, corporate and Shari’ah governance mechanisms, and maqasid performance